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Emerging Markets : Investors shift into safety first mode

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Institutional investors are showing a marked preference for developed market equities over emerging market shares as they rein in risk in their portfolios in response to recent market volatility, according to a research report by State Street Global Markets International.

Investors have turned more risk averse than at any time in the past 12 months, and a quick move back to risk-seeking behavior is unlikely, the firm said in the report published on August 10.

State Street uses “investment regimes” to describe the main themes driving investor behavior and the pattern of cross-border equity flows. It says investors have shifted to a safety-first regime and away from aggressive risk taking. The firm’s most risk-averse regime is known as the “riot point,” which is marked by indiscriminate equity selling.

With more than $13 trillion of assets under management, State Street uses its proprietary data to monitor investment flows. It said that flows into equities in emerging Asian countries have slumped to the 5th percentile, meaning that the flows were higher on 95% of occasions in the past 10 years. State Street says investors also have been unwinding carry trades, in which they have borrowed in low-yield currencies such as the Swiss franc and the Japanese yen to invest in assets in higher-yielding currencies.